DP4140 A Theory of North-South Trade and Globalization

Author(s): Elias Dinopoulos , Paul Segerstrom

Publication Date: December 2003

Keyword(s): economic growth , north-south trade , globalization , intellectual property rights

JEL(s): F12 , F43 , O31 , O34

Programme Areas: International Trade and Regional Economics

Link to this Page: www.cepr.org/pubs/dps/DP4140.asp

This Paper develops a dynamic general equilibrium model of North-South trade with scale-invariant growth. Northern firms devote resources to innovative R&D to discover higher quality products and Southern firms devote resources to imitative R&D to copy state-of-the-art quality Northern products. Both innovation and imitation rates are endogenously determined as well as the degree of wage inequality between Northern and Southern workers. The steady-state effects of globalization and stronger protection of intellectual property are analysed. It is shown that globalization leads to more copying of Northern products, faster technological change, and less wage inequality between Northern and Southern workers. Stronger intellectual property protection has the opposite steady-state effects and thus serves to moderate the effects of globalization.